Groupon stock sinks to new low, investors sue
chicagobusiness.com
chicagobusiness.com
I very much doubt the legitimacy of this story, but I was in a barbershop a few weeks ago, where the owner told me about one of the Groupon executives who was in the shop earlier. He was saying we shouldn't expect Groupon to be around in 10 years because the company's plan is to collect as much cash as possible, fire everybody, and shut down, keeping the money for the investors. While I doubt a Groupon executive would have actually said that in a barbershop, I can believe that actually was their long-term plan, but if things keep up at their current rate, I'm not sure if Groupon will even last that long.
Every bubble produces these, but usually the money is kept for the management-investors only. SCMR and Zhone from the tech bubble executed that plan spectacularly.
Great source!
What really gets me is the barbershop post actually admits that it's very unlikely for the source to be telling the truth, then goes on to give it credit anyway because it agrees with his own speculation.
Because the problem isn't the source (the barber). It's the idea that a groupon executive would have said something like this to his barber, physician, plumber etc.
Maybe bragging to his call girl, maybe to a friend when drunk (and was overheard) but it's ridiculous to think someone would say something like this even in jest.
Maybe I'm naive, but it seems like there's always been this question mark over their model being non-sustainable, and to those who are aware of 37Signals hold them in much higher esteem.
Every time someone says this, the neck-hairs of every Orbitz employee (current and former) stand up on end and twitch a little.
It's a shame that a lot of people have forgotten that and mention Groupon and GrubHub like they're the one-and-only models for a startup scene in this city.
The same investors behind Groupon are funding many other startups. They've got plenty more ponzi startups waiting in the wings.
I can't honestly put anything down to words that could describe why, or if it's just coincidence. Just an odd trend.
[1]http://articles.marketwatch.com/2011-12-07/economy/30779893_...
Anyways...so...would you say the following are all sleazy: braintree, orbitz, threadless (aka skinnycorp), 37signals
Those are the next startups i think about when i think chicago.
Orbitz does some cool stuff, but it isn't a startup. It was a spinoff from various megacorps.
37signals manages to work within the Chicago paradigm. However, they are run more like a small business than a high-growth startup.
Grubhub would be more a Chicago success story.
The fact that Google even offered that much leads me to believe that they have jumped the shark with that offer.
Anybody who knows anything about retail would have studied the business model and realized that this was not sustainable. Obvious red flags: 1. Heavy reliance on field sales (the largest expense), which is NOT scalable 2. Exclusive reliance on repeat sales as the key driver of sustainability: this being the obvious case, did Google not do its due diligence and actually surveyed past Groupon customers? Such a siimple survey would have easily revealed the issues of this "local deals" model. 3. Heavy reliance on "small business" owners as the driver of revenue. This is a sensitive and fickle market, where even slight movements in the general economy will cause huge moves in spending patterns.
These 3 points were readily available to anybody with some insight into this segment; Google with all its money must be surrounded by "yes" men, nothing else could explain it's willingness to part with $6 billion so quickly.
That could have created negative press and damaged their pump-and-dump strategy for the IPO.
Groupon is not a bet on the coupons business--that doesn't justify the current valuation. Groupon is a bet that if you can reinvent the Yellow Pages, at scale and online, you can make a ridiculous amount of money. It's probably one of the largest companies around with such a high probability of failure, but their value if they end up being the winner in local is just staggering.
It would be interesting to see someone chart this.
(No comment about Groupon's long-term viability is being implied here).
Public companies are sued all the time for this kind of stuff. These lawsuits often allege misrepresentation in a company's SEC filings.
On the other hand, Chicago business is full of bugs. Ghostery block 13 (!) calls to different websites such as: Quantcast, 24/7 real media, Outbrain etc... I won't visit this website again. I wish I was warned of that before hand not when I go to the website, I value my privacy more than going there.
A little premature to write an obituary of a company that finished 2011 with 1.6B in revenue.
That is debatable. Consider this: Amazon started off just selling books, today they are gunning for Walmart. At the time, people raised similar objections and Amazon took heat for years for remaining unprofitable. No one is complaining today.
Similarly, I see Groupon's deals business as just one product. There are signs from their recent aquisitions that they might diversify with new products targeted at the same small businesses(such as credit card processing).
Now, just because it all ended well for Amazon doesn't mean the same will happen for Groupon. I am just pointing out that it is not a foreign strategy to prefer growth over profitability for many years after the IPO.
Web-based companies have to make a profit too. Why do people forget this?
I'd invest my money in a company who makes 200,000 in revenue with 100,000 in profits much faster than one who makes 200,000,000,000,000 in revenue with 0 in profits.
To me, this seems so basic, and I'm certainly not very well versed in business. Am I missing something?
Under GAAP, money which is contractually owed to a third party at the time of collection is not booked as revenue. Under Groupon's accounting practices, it is. This allows them to inflate revenue while downstating their liabilities. This is why the SEC is investigating them for fraud.
http://www.sec.gov/Archives/edgar/data/1490281/0001445305120...
The "Gross Billings" numbers include the total amount of deals "sold", including the merchants' portions. The smaller "revenues" number front-loads income that should be recorded over time i.e., by including items that should be recorded in reserves or liabilities until such items are resolved.
For example, Groupon treats as revenue all of Groupon's theoretical portion of a sale, including any amounts that it knows will have to refund and amounts that it estimates that it will have to refund. However, such items are not revenue, either b/c Groupon knows it will be refunding such items (and thus has no claim to the money), or because it expects that it may have to. Such items are supposed to be tracked in a separate account. The separate account is balanced out by a reserve account (a liability) which is removed from the books when the risk of refund has passed.
Further, the SEC hasn't actually kicked off a formal investigation and if it does, it will be for financial control and accounting deficiencies, not fraud.
Also, as to the SEC investigation, it could potentially be for both, as fraud would relate to the numbers in the 10-K filing and other filings with the SEC, in addition to financial and accounting deficiencies. SEC investigations are not criminal investigations--the SEC does not have to lay out "charges" prior to beginning its investigation.
This is simply false. Not only does it net out reserves from revenue, it even nets them out from gross billings:
"Gross billings. This metric represents the gross amounts collected from customers for Groupons sold, excluding any applicable taxes and net of estimated refunds. We consider this metric to be an important indicator of our growth and business performance as it is a proxy for the dollar volume of transactions through our marketplace, net of tax and reserves."
All I said was that the SEC had not begun a formal investigation, which is fact. And I stand by my contention that "fraud" is probably the wrong description.
Making a bil in revenue by the way of your example versus Groupon's way have very different risks associated with it.
Revenue != profit. You could generate a trillion in revenue. What's left after the bills are paid is what counts.
If your argument that profits right now are the only thing that matter, then you'd be hating on amazon for the same reason you're hating on groupon. And if Amazon listened to folks like you and went for immediate profitability, they'd likely not have the growth they did.
The real argument anti-groupon folks should be making is that in the long term, they don't see profitability. Too much emphasis is being put on their present unprofitability.
I don't really watch this company but if I remember correctly, their way of doing accounting was to show all received money from customers as income instead of liabilities since they were collecting half of it on behalf of vendors.
They were simply inflating their revenue but it's not like it matters, because profit (loss) would be always the same regardless.
This is not surprising to me - I did say that they were going to "ladder" the price and pocket a huge chunk of money - then watch everyone else get screwed.
== Sources ==
My previous comments on Groupon: http://news.ycombinator.com/item?id=3139614
Groupon Chooses Goldman Sachs & Morgan Stanley as the underwriters for their IPO: http://www.bloomberg.com/news/2011-04-15/groupon-said-to-cho...
Goldman calls their clients "Muppets": http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-g...
It's really just semantics at this point. There is a lot of evidence here that suggests systematic misleading (if not out-right defrauding) of investors. So you while you are technically correct, I think what Groupon has done is in the spirit of Ponzi even if it is executed differently. What's happened here is more than just a bad business plan executed honestly producing poor results. Just because we don't have the exact word for it doesn't make it any more ethical.
Groupon only pays out about 45% of gross bookings. Ponzis generally pay out closer to 100%. Once it brings sales and marketing to a reasonable level it should be wildly profitable.
It is that money sitting in the account that gives Groupon the cash flow it needs to hire more sales people to grow the revenues further, but remember always that a % of that must be returned to the customer at a future date. Where it falls apart is when your new sales can no longer replenish the client account (no it does not sit in a trust or escrow, but in company's general operating account).
So what happens when Groupon declares Bankruptcy? All that money sitting in the account is gone, customers get NOTHING back. Yes, this is indeed a Ponzi scheme because the last customers in get nothing, even though they are owed the %.
But no, not a ponzi scheme at all.
As someone who lives in Chicago, I am worried about its failure and with that the future of the tech scene in Chicago.
But they're not our sole pillar any more. I think we all know that pillar is going to come crashing down in the near future, and we're ready.
Groupon helped propel us to where we are, and we're standing on our own now. In my opinion, the future of tech in Chicago will not solely depend on Groupon's activity.
It's an exciting time.
Those that are sent packing when Groupon shuffles off this mortal coil will get snapped up in a hurry. The other 5k+ twenty-something sales force will be much more problematic. If you're under 35, you know at least one person who works there, so it's going to be a real horror show when all those people get tossed out on their collective asses.
I wonder if there was some pressure from investment bankers who want to encourage more IPOs as well as government types who want the law to seen as a success.
Perhaps those people should have been reading Hacker News:
http://www.hnsearch.com/search#request/all&q=groupon&...
(The first post is rather long and fairly neutral, but check out some of the posts (and their dates) right after that.)
http://www.hnsearch.com/search#request/submissions&q=gro...
There are articles with headlines like "Industry-Changing, Profit Machine", "Is Groupon The Next Google?" (money quote from the article: "I think that, if anything, Groupon is severely undervalued.", etc. Prize for the first seriously skeptical piece discussed on HN is "Why Groupon is Overvalued" by Phil Michaelson:
It's not just Groupon, this entire business model is unsustainable: asking a retailer to discount his products for a fee in the hopes that he will attract new "local deal" customers willing to pay full retail next time, when the ONLY reason these customers came in the first place was because of the discount.
1) Groupon taks a large cut on top of the big discount. It used to be that GroupOn wanted a 50% discount and then 50% of the revenue. This is like running a 75% off sale.
2) The customers are poorly-qualified leads. All we know is that they are local and like a good deal. That doesn't give the retailer much indication that they would be a good customer (and I think we have seen that they aren't).
I remember my girlfriend many years ago working in a restaurant that offered a ‘kids eat free’ deal one night a week. People would come in with their kids and their neighbors’ kids, order one burger and let the restaurant feed a bunch of kids for nothing. Obviously the restaurant needed to put some terms around the deal, which they later did, but some people are just a blight on humanity in this way.
Rovio was in the business for 5 years before Angry Birds, and I doubt they'll have another hit like Angry Birds ever again.
Id fell apart when it couldn't come up with something better than the Doom franchise.
OMGPOP was very smart to sell out to Zynga, because there is no way it would have come up with something even close to Draw Something in another 5 years.
Unlike rock stars and pop singers, creating a string of gaming hits is so much harder because it requires the perfect storm of so many variables each and every time, whereas a single person like Adele, Amy Winehouse, etc. can rely on their genius alone to create a hit.
First off, have you seen the way Blizzard's stock performed during 2008? It was one of the few that continued to grow...
Rovio has more than just Angry Birds direct sales, it has a TON of merchandising opportunities with the characters (think Pixar). Plus they have a huge base of users that is excited to see what's next.
I'd also contend the rock stars analogy is backward - It is FAR more risky to assume a sole person can continue re-inventing themselves over a entire career. Granted, it's hard for game publishers, but at least there's a team and a more defined process for the innovation.
Except for, you know... Quake.
On your other point. The difference between Zynga and EA is that Zynga's games have a huge turnover rate and a very low percentage of paying customers. EA's games -- at least most of their games -- have 100% paying customers and have a large returning customer rate year after year (Madden 11, Madden 12, Madden 13, Fifa 11, Fifa 12...).
So in other words, Zynga's business model is completely different than EA's.
If I hold the general consensus opinion here that Groupon is heading to insolvency, and let's say it will be insolvent by January 2013, is it cheaper then to attempt to acquire Groupon stock to short it on margin than to buy a January 2013 put, even if your margin is running at 60%?
As a casual investor the option probably wins because you can sleep easier at night knowing that if GroupOn announce a cure for cancer you are only losing the $2.
Borrowing occurs when you short NOT when you buy puts. Puts are expensive because of the stock's volatility (and exercise price). The higher the volatility, the more expensive the option (call/put) is. Just check the math of the Black-Scholes options pricing model.
When it all comes down in flames, (I think it's already begun - if you haven't gotten out, get out now) the only saving grace is that the CEO and board will be embattled in court for years. The investors might get a few pennies on the dollar.
Both banks already made their money (and then some) on the IPO and associated fees. Now of course, assuming the banks had no knowledge of Groupon's true financial health; they did nothing illegal.
BUT ethically, brokers/traders have a responsibility to informed their clients when it's time to cash out. A lot of people made money off this deal. And lot didn't.
But Groupon, if what I'm hearing is true, is committing fraud. I mean, my god, are they cooking the books? Sort of reminds me of Enron. But only time (and many lawsuits later) will tell.
1) Merchants perception of the whole daily deal market is very negative. Repeat business is quite low and it mainly attracts the spendthrifts who are looking for a deal. Given the margins that most local businesses have, running a daily deal means taking a hit on those margins.
2) From a consumer perspective, the novelty of the daily deals market has really worn off. Consumer fatigue has set in and more and more people are tired of having their inboxes flooded with emails. Personalization is still a joke and ticks people off even further.
It wont be long before the whole local deal market implodes (think of it -- the 2nd largest player - LivingSocial is not yet profitable). Groupon is well aware of this and so is trying to ramp up its technology platform via acquisitions to eventually evolve into something more. Its just a matter of time that the whole thing comes crashing down.
This is different from your event sale, which are an excellent way to gain repeated customers (and upsell them). There is a future for local deal sites but it needs a different hook with customers.
But the technology needs to help the small business actually improve. Groupon doesn't do this. For the most part, it plays smoke and mirrors with revenues and the costs or profits are not entirely known because the small business cannot measure them.
So basically, I want to drink the koolaid but god damn you if it makes me sick...
You should not be allowed to sue as a method to correct your own stupidity.
I think it is a valid approach because a company should be able to get its own accounting correct. However, based on the creative accounting from Groupon (and other issues) I'm really surprised the FTC allowed them to have an IPO to begin with.
At some point, personal responsibility for your own investments is part of the risk.
If that's the case, it's pretty clear-cut fraud, which supports the lawsuit argument even more.
People don't necessarily invest in things they think are particularly good business models. They invest in things that are undervalued. If you looked at the revenue/price and thought it was undervalued and then Groupon changed 3 years worth of data on your after you made a stock purchase, you'd sue too.
Just look at these reductions. They're more than just a minor correction from Groupon:
- For 2008, revenue was reduced to $5,000, from $94,000.
- For 2009, revenue was reduced to $14.54 million, from $30.47 million.
- For 2010, revenue was reduced to $312.9 million, from $713.4 million.
If you can't figure out the business model generating the reported millions, it's your own fault for thinking those millions are undervalued.
How many of these investors didn't actually care about the value of the stock, so long as there was somebody around tomorrow that would buy it for more?
Sorry, but I have no sympathy when you willingly play the game and then get burned by the same things you intended to inflict on someone else.
How, exactly, would I figure out that Groupon was lying/mistaken in their financials?
Lawsuits are basically part of the cost of doing business nowadays.